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A Manifesto for Economic Sense

More than four years after the financial crisis began, the world's major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.

These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.

  • The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions - other than Greece - this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
  • The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but - just like the similar response of debtors in the 1930s - it has proved collectively self-defeating, because one person's spending is another person's income. The result of the spending collapse has been an economic depression that has worsened the public debt.
  • The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that's exactly what many governments are now doing.
  • The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn - focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing and exacerbating the dampening effects of private-sector spending cuts.

In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy - while it should do all it can - cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.

How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.

The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.

But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.

Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF's study is clear - budget cuts retard recovery. And that is what is happening now - the countries with the biggest budget cuts have experienced the biggest falls in output.

For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.

So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.

The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.

In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.

As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.

Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

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Signed By

Aaron Goldzimer - Stanford Graduate School of Business / Yale Law School
Alan Manning - London School of Economics
Alan Maynard - University of York
Alan S. Blinder - Princeton University
Alasdair Smith - University of Sussex
Alfonso Lasso de la Vega - Former Deputy Director in UNCTAD
Ali Rattansi - Professor, City University, London
Andrew Graham - Oxford University
Barbara Petrongolo - Queen Mary University and CEP (LSE)
Barbara Wolfe - University of Wisconsin-Madison
Barry Bluestone - Northeastern University
Barry Supple - University of Cambridge
Charles Wyplosz - The Graduate Institute, Geneva
Chris Pissarides - London School of Economics and Political Science
Christian Kroll - University of Bremen / Jacobs University
Christopher Allsopp - Director, Oxford Insitute for Energy Studies, Oxford
Colin Thain - University of Birmingham, UK
David Blanchflower - Dartmouth College
David Hemenway, economist - Harvard School of Public Health
David Sapsford - Edward Gonner Professor of Applied Economics (Emeritus), University of Liverpool
David Soskice - University of Oxford
David Vines - Oxford University
Demetrios Papathanasiou - The World Bank
Donald R. Davis - Columbia University, Dept. of Economics
Eric van Wincoop - University of Virginia
Erzo F.P. Luttmer - Dartmouth College
G C Harcourt - University of New South Wales, School of Economics
Gary Mongiovi - St Johns University, New York
Geoffrey M. Hodgson - Professor, University of Hertfordshire, UK
Geraint Johnes - Lancaster University
Gianni Zanini - World Bank (Consultant; former Lead Economist)
Hannes Schwandt - CEP/LSE and Universitat Pompeu Fabra
Heinz Kurz - University of Graz, Austria
J. Bradford DeLong - U.C. Berkeley
Jan-Emmanuel De Neve - University College London & LSE Centre for Economic Performance
Jeffrey Frankel - Harvard University
Jeremy Hardie - LSE Centre for Philosophy of Natural and Social Science
Joan Costa Font - London Sschool of Economics
Jocelyn Boussard - European Commission
John H Bishop - Cornell University
John Van Reenen - Centre for Economic Performance, LSE
Jonathan Portes - National Institute of Economic and Social Research
Joseph Gagnon - Peterson Institute for International Economics
Justin Wolfers - Princeton University
Kalim Siddiqui - Business School, University of Huddersfield, UK
Ken Coutts - Faculty of Economics, University of Cambridge
Kevin ORourke - University of Oxford
Larry L Duetsch - Emeritus Prof of Econ, U of Wisconsin - Parkside
Lesley Potters - European Commission
Marcus Miller - Warwick University
Mariana Mazzucato - University of Sussex
Mark Setterfield - Trinity College, Connecticut
Mark Stewart - Warwick University
Max Steuer - London School of Economics
Michael Ambrosi - Professor Emeritus, University of Trier
Michael Graff - ETH Zurich and Jacobs University Bremen
Michael Waterson - University of Warwick
Nathan Cutler - Harvard Kennedy School
Nattavudh Powdthavee - University of Melbourne and Centre for Economic Performance, London School of Economics and Political Sciences
Nicholas Rau - University College London
Olaf Storbeck - Handelsblatt - Germanys Business and Financial Daily
Oriana Bandiera - London School of Economics
P.E. - Emeritus Professor of Economics,University of Reading
Patricia Rice - University of Oxford
Paul Anand - Open University/ HERC Oxford University
Paul Gregg - Professor, Dept of Social and Policy Sciences, University of Bath
Paul Krugman - Princeton University
Peter E. Earl - University of Queensland
Peter Elias - University of Warwick
Peter J. Hammond - University of Warwick
Peter Taylor-Gooby - University of Kent
Peter Temin - MIT
Philip Arestis - University of Cambridge
Philippe Martin - sciences po (paris)
Professor Paul Whiteley - University of Essex
Professor Sir Richard Jolly - Institute of Development Studies
Raffaella Sadun - Harvard Business School
Raja Junankar - University of New South Wales, University of Western Sydney, and IZA
Raquel Fernandez - NYU
Richard J. Smith - Faculty of Economics University of Cambridge
Richard Jackman - London School of Economics
Richard Layard - LSE Centre for Economic Performance
Richard Murray - former chief economist, Swedish Agency for Public Management
Richard Parker - Harvard University
Rick van der Ploeg - University of Oxford
Robert A. Feldman - IMF and Adjunct Professor Georgetown U. (retired)
Robert H. Frank - Cornell University
Robert Haveman - University of Wisconsin-Madison
Robert Neild - Emeritus Professor,Trinity College, Cambridge
Robert Pollack - Boston University
Robert Skidelsky - Wawick University
Roger Middleton - University of Bristol
Roger Stephen Crisp - St Annes College, Oxford
Ronald Schettkat - Schumpeter School, University of Wuppertal
Sergio Rossi - Department of Economics, University of Fribourg, Switzerland
Shaun P. Hargreaves Heap - University of East Anglia
Sheila Dow - University of Stirling (emeritus position)
Simon Wren-Lewis - Oxford University
Stefan Szymanski - University of Michigan
Stephen E. Spear - Carnegie Mellon University
Stephen Gibbons - London School of Economics
Susan Himmelweit - The Open University, UK
Terry Barker - University of Cambridge
Tony Venables - University of Oxford
Victor Halberstadt - Leiden University
Wendy Carlin - UCL
William Brown - University of Cambridge
William T. Dickens - Northeastern University and The Brookings Institution


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Recent Comments

  • The false theories about how to fix the economic crises show the politics behind the decisions of policymakers. The economists should awake and not get scared of trying new ideas.
    César Jeanpierre
  • This manifesto cuts through the clutter of economic arguments over the past five years and states the issues and solutions clearly and convincingly. Long overdue and very welcome.
    Robert Ewy
  • Economists is a social science that needs more science. I have been surprised at what is allowed to go unchallenged in the media.
    Ron Grande
  • The developing world needs new economic models the most, because they are more flexible to change and have greater ability to establish new systems, they could form exemplary models for change towards future economics.
  • These economists have been calling it correctly for many years. It is time the VSPs took responsible action.
    Thomas Wilkie
  • Glass-Steagall was clearly the right idea, as is evident by the result of its repeal. When deregulation allowed financiers to distort the "game" to their advantage, the resulting imbalance and crash was logically inevitable. As parents, we would agree that "deregulation" of our children would be insanity. As a society, perhaps the current scene will convince us that deregulation of the banking/finance industry is equally insane.
    Robert Volin
  • Agree with the broad thrust. However it is obvious that the demand/supply causal argument doesn factor in globalisation in two ways : 1. Discounts supply of goods from Asia where arguably unemployment is low and the Chinese economy is stretched even at a GDP growth rate of 6-8%. Relative to the time period of 1992 - 2008 Supply is being constrained. Just look at the massive amount of resources being imported to China from Australia, Brazil etc. in order to sustain this supply. This is not to mention the gerry built industrial machinary pooring toxic fumes out whilst trying to keep up. The boom times of this earlier period relied on cheap and sustainable supply of goods imported from China which is no longer happening. 2. Discounts the fact that the boom of the earlier period of 1992-2008 required huge investment of Chinese surplus dollars into U.S. and Europe. The Chinese are wary of these investment avenues and are now seeking alternative investments away from Europe and U.S. What Europe and the U.S. both need is massive governement stimulus not in sectors supplying their domestic economies, but in the sectors producing exports. Middle Class welfare in both countries needs to be drastically slashed and export industries heavily promoted in order to restore the balance of trade. The "service economy" is dead. Thats right corporations in the Western world have accumulated more "dead wood" than at any time in the last 100 years. The best paid people in many U.S Corporations contribute little or nothing to exports and their jobs exist solely on the basis of government bailouts and lax regulation of markets across all sectors. Yes, real competition is dead. People are being rewarreded for bing inefficient and non-competetive. All this needs to change and fast. The people in the U.S congress Im afraid need to vote themselves and may of their constituents out of their current jobs. Thats right vote in stimulus measures for export industries and vote out middle class welfare.
    Peter Luck
  • The world is running carelessly on credit/major risk taking. As a general citizen we are always advised to not get into debt & not waste money or make extreme risks. What are these financial leaders doing breaking all of these rules? We should not get into debt for warfare that is not our own problem, we should not be bailing out banks. The banksters have a crazy monopoly, how is it that they have been allowed to make the most profit ever this year (corporations), while the entire world suffers. What about Glass-Steagall? This would protect us and help us build our economy back up or else the entire globe is headed for financial doom, riots, homeless people, businesses bankrupt etc etc ... is this what the Government wants? Put someone in power that has some sense. I have a degree, but there are no jobs ... get the country back on its feet so businesses can thrive instead of dive!
    Yolanda Goddard
  • I agree that the world is acting drunk on credit. Most nations are also terrified of taxes. When will we learn that countries can run without funding and that most funding comes from taxes, from residents, but also from the corporations who seek tax benefits or off-shore their funds to avoid paying their fair share!
    Carole Campbell, Ph.D.
  • While I do not agree with all details of the manifesto and think that reducing public spending would be a good thing in countries such as Italy, the broad thrust is correct and urgent.
    Luca Bucchini
  • "Basic Economics"
    Claudio Vieira
  • I agree wholeheartedly with the manifesto. It has been a theory I have watched being played out over the last 20 years in consumer societies such as ours the only investment has been in the retail industry (the building of huge shopping arcades) whils this is all well and good. Where is the investment in production, to offset, in other words where is the public going to get the money to spend in these wonderful new shopping meccas.
  • Analyse correcte, mais le FMI après un constat sans faille continue à faire nimporte quoi. Un seul mot dordre mondial : nous avons assez payé, de lAfrique à lEurope, arrêtons de rembourser (voir discours de Sankara à lONU)
    Jean Roy
  • Remember, money is just paper. It is all about the the incentive in people. If people drive themselves forward, work a little bit harder, try different ideas, pick themself up if they fail -that produces growth. Spending is a way to start this upward spiral.
    Karl-Erik Johansson
  • As a German lecturer in Economics and a professional economist for an industry association and a convinced European citizen I strongly support this manifesto for Economic Sense and declare my opposition to the disastrous policies of austerity in times of crises, mass unemployment and public underinvestment.
    Kai van de Loo
  • The manifestos position on a need for increased government stabilization of western economies is sound and reflects a consistent analysis of the failures during the great depression. Why make the same mistakes again because of ideological posturing?
    Robert Feingold
  • I have been claiming for this for a long time (search for stimlus or Keynes in my blog here: However, the problem is not solved by demand management alone especially in some major economies like the USA and Japan.
    A.J. Marques-Mendes
  • I agree with the broad thrust and the depression concern underscored in the manifesto. However, as usual the devil might be hiding in the details. I for one would have liked to see some discussion on the importance of the composition of demand. Consider the case of Turkey, not an advanced one, but a largish emerging economy which pulled of an impressive growth record amidst a global recession. This is attributable to the surge in internal demand and was facilitated by the ability to finance large current account deficits. During this time the government followed prudent fiscal and monetary policy, and improved tax collection. Wisely it did not follow the stricter austerity proposals of the IMF but did not try to stimulate demand either. The growth was accompanied by a real estate boom and an unprecedented increase in private borrowing. These developments provide the markings of a bubble. This particular combination of internal demand surge and deficit financing strikes me as something which is not sustainable. Returning to the manifesto, I have to ask "building what?"
    insan tunali
  • "History teaches us that no-one has learnt from History" - Hegel
    Daniel Jameson
  • I have been writing articles on this subject in the same fashion with the manifesto. The core of the problem lies in the false belief that "national wealth" can increase at higher rate than the GDP growth. "The public" as a whole cannot get rich by investing in real or financial assets. Now that there is a crises those who got rich by speculation and caused the crises (without bad intention) must get poor. To make them poor the government must borrow their "savings" at a negative rate of interst and spend it. So that economy resumes the normal speed.
    Ege Cansen, Business Columnist